Just when you thought ETF expenses couldn’t go any lower, Malvern-based investment giant Vanguard has slashed expense ratios on 15 S&P and Russell index-based ETFs, according to its latest annual reports.
While assets in the 15 ETFs grew over the funds’ fiscal year, which ended Aug. 31, expenses fell. Some of the annual expenses dropped by hundredths of one percentage point, known as basis points.
For example, the S&P Smallcap 600 ETF’s expense ratio — the amount investors pay Vanguard annually to manage the fund — fell from 0.15% of assets to 0.10% in the latest year. Assets in the fund fell from $1.1 billion to $991 million.
Lower fees are good for investors because they can lead to much bigger returns over the long term.
“Vanguard typically is able to cut expenses by one or two, and sometimes three, basis points over the course of a year. But cuts of four to five basis points are very, very rare,” said Dan Wiener, who co-edits the Adviser Investments newsletter for Vanguard investors.
So, how did Vanguard manage to cut fees again?
“My guess is that they were able to renegotiate their licensing agreements with S&P and Russell, allowing them to cut costs dramatically,” said Wiener. “Lower expense ratios accrue directly to investors’ bottom lines. This is just another shot fired in the fee wars that continue to rage in the ETF industry."
The late Jack Bogle, founder of Vanguard Group, popularized index funds and was a fierce advocate of low-fee investing. He argued that few active managers could outperform the broader stock market and that fees were a drag on performance. Thanks in part to American investors’ shift to passive investing in index funds after the financial crisis, Vanguard now manages over $5 trillion in assets.
If you’re interested in finding fees and expense ratios for Vanguard index funds or ETFs you own, these are available through the firm’s annual reports, available online at https://personal.vanguard.com/us/litfulfillment/ELFReports?categoryCd=PRRP&subcategoryCd=ETRP&view=default. Check under “Financial Highlights” for the ratio of expenses to average net assets.
“However, it is premature to report any expense ratio reductions at this time,” said spokesperson Freddy Martino in an email.
Vanguard funds and ETFs all have a fiscal year-end reporting period that falls within a six-month period ranging from August through January. Per industry regulations, each fund must file an annual report within 60 days and a prospectus within 120 days of the fiscal year end. The pattern repeats for September, October, November, December, and January fiscal year ends.
“The prospectus figure is the expense ratio of record, due to the fact that they may change between the time of the annual report filing and the subsequent prospectus filing,” Vanguard’s Martino said. "The bottom line is you will see the funds listed report their expense ratios in December.”
Charles Schwab last month cut fees to zero for all trades on its online brokerage platform. Other brokerages soon matched Schwab, with Fidelity announcing its own plan to zero commissions on stock trades. (Fidelity had already cut fees on more than 500 ETFs this year.)
What caused the shift? Schwab said it was a matter of when, not if, the industry and competitors would move to zero fees on trades, so they opted to jump first.
But it was Vanguard last summer that cut fees on 1,800 ETFs, starting the fee war.